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Merger, capex ramp-up awaited

Sudarshan Chemical (SCHI IN) has corrected 11% in the past six months, but it has outperformed the NSE Small-Cap Index, which fell 16%, primarily due to the Heubach acquisition and improving demand outlook for the dyes & pigment industry. Q3 results continued to post YoY growth with rise in exports demand. However, it saw some impact from weak coating demand and inventory de-stocking. We cut our EPS estimates by 27-28% during FY26-27 with lower EBITDA margin and increased interest cost. Therefore, we lower our DCF-based TP of INR 1,114. We reiterate Buy as we remain positive in the long term with reducing raw material cost linked with crude oil, continued recovery in dyes & pigments demand, and increasing bargaining power of suppliers with industry consolidation.

Revenue growth continues YoY: Adjusted Q3 EBITDA was up 28% YoY and down 16% QoQ at INR 790mn vs our estimates of INR 964mn and PAT was up 115% YoY and down 24% QoQ at INR 313mn vs our estimates of INR 411mn, as Q3 is a seasonally weak quarter. SCHI reported an exceptional loss of INR 308mn due to transaction cost regarding the Heubach acquisition. Revenue of INR 6.7bn was up 18% YoY vs our estimates of INR 5.9bn. EBITDA margin was at 11.9% vs 10.9% in Q3FY24 and 13.6% in Q2FY25. Domestic revenue (comprising 48% of total revenue) grew 3% YoY. Exports revenue was up 29% YoY

RIECO’s transformation plan; Heubach acquisition to be completed in March: Management says it is continuing to work on a transformation plan for its subsidiary, RIECO. The transformation will take place over the next 18-24 months. SCHI expects acquisition of the Heubach Group to be completed by March 2025. It has raised INR 11bn via equity funding and plans to raise another INR ~10bn via debt for restructuring and working capital needs. Global chemical companies’ commentary indicates dyes & pigment segment demand is reviving at a faster rate in the chemicals sector while several large global firms are planning to fully or partly exit from this segment, which is at an advantage to SCHI in the long term

Reiterate Buy with a lower TP of INR 1,114: Based on 9MFY26 financials, we trim FY26E and FY27E EPS by 27% and 28%, respectively, due to higher operating expenses and increase in interest cost, due to the Heubach acquisition. We expect a revenue CAGR at 10% and an EBITDA CAGR at 16% during FY24-27E. We lower our TP to INR 1,114 from INR 1,186 based on a DCF method, assuming a 4% (from 5%) terminal growth rate and a 10.9% (from 10.6%) cost of capital. We reiterate Buy, as we factor in expectations of a YoY growth, led by new product launches, entry in new geographies, and acquisition of a major competitor, which gives access to technology, manufacturing sites in the EU, and products portfolio.

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